Budget Busting Deal on Tax Provisions
Congressional negotiators are reportedly nearing a deal to address the year-end tax extenders while adding $500 billion to the debt. By reinstating, making permanent, and in some cases significantly expanding a number of tax provisions, this deal would give away half of the revenue raised from fiscal cliff deal or about half the savings generated from the sequester, undoing some of the progress that has been made toward long-term deficit reduction. Horse trading one permanent provision for another and adding other "sweeteners" reportedly under consideration could push the price tag even higher.
Policymakers should fully offset the cost of any new spending or tax breaks, especially permanent ones. But perhaps most disconcerting about these discussions is that they are apparently considering expanding a number of provisions beyond what a permanent extension would cost – the expanded version of the R&D credit under discussion would double its pricetag. The table below outlines the reported deal with cost estimates for each provision (though based on reports of the total cost, some provisions may not have been reported yet).
Because of expanding the provisions, the deal will cost about $120 billion (after interest) than a straight extension.
Potential Tax Extenders Deal (Ten-Year Cost)
| Policy | Cost of Reported Deal | Incremental Costs Above Straight Extension |
| Expand and make the research & experimentation credit permanent | ~ $160 billion | ~ $ 85 billion |
| Restore 2013 levels of small business expensing permanently (Section 179) | $73 billion | $4 billion |
| Extend the American Opportunity Tax Credit permanently and index to inflation | ~ $73 billion | ~ $5 billion |
| Permanently allow state residents to deduct sales tax instead of income tax | $34 billion | - |
| Extend the Wind production tax credit for 2 years, and phase it out over the next two | ~ $20 billion | - |
| Permanently extend increased deduction for mass transit commuters | $2 billion | - |
| Permanently extend tax-free charitable donations from retirement plan | $8 billion | - |
| Extend 2 S-Corporation provisions | $2 billion | - |
| Create a category of tax-free savings account for disabled individuals (ABLE Act) | $2 billion | $2 billion |
| Permanently extend a provision for businesses donating food | $2 billion | - |
| Extend more generous limits for donating conservation easements | $2 billion | - |
| Extend the rest of the tax extenders through the end of 2015 | $43 billion | - |
| Other unreported provisions | ~ $20 billion | ? |
| Potential Costs of the Lame Duck | ~ $440 billion | ~ $100 billion |
| Interest Costs | ~ $90 billion | ~ $20 billion |
| Total Debt Impact | ~ $530 billion | ~ $120 billion |
Source: JCT, CBO, CRFB calculations
Members from both parties have strongly advocated comprehensive tax reform which carefully scrutinizes and reduces the number and cost of various tax breaks in order to reduce rates, deficits, or both. Yet this deal would do the opposite, rubberstamping the continuation of all the extenders and permanently extending many of the most expensive ones. With a $500 billion price tag, this would be a costly mistake.
As in our recently released PREP Plan, Congress should pass a temporary and fully paid for extenders package accompanied with a fast track process to get to comprehensive tax reform. As CRFB President Maya MacGuineas said in our press release today:
Expanding and making permanent so many provisions will deal a severe blow to fiscal responsibility, driving the debt up by hundreds of billions of dollars we just can’t afford...certainly if policymakers are going to be fiscally irresponsible, they should limit that irresponsibility to the short-term rather than imposing permanently higher deficits on future generations.
Further Reading:
See our Tax Break-Down for an overview of the about 50 provisions.
Extending the tax provisions without offsets:
- Lowers the baseline for tax reform,
- Makes costs disappear from the budget process, and
- Increases the risk of abandoning PAYGO altogether.
